Friday, July 29. 2016

In October, the SEC will implement changes to money market fund rules and forms. These changes concern the removal of certain references to credit ratings as well as amendments to the issuer diversification requirements. These changes were initially proposed in March 2011 and proposed a second time in July 2014, and implementing them will bring rule 2a-7, the principal rule that governs money market funds, and Form N-MFP, the form that money markets use to report their portfolios to the SEC, into alignment with the provisions of the Dodd-Frank Act.

The Dodd-Frank Act mandates that each federal agency review its use of credit ratings in assessing credit-worthiness. In an effort to comply with these provisions, the SEC will replace references to credit ratings issued by designated nationally recognized statistical ratings organizations (“NRSROs”) in two rules and four forms. With respect to rule 2a-7, the amendments will remove references to ratings and adopt a uniform standard to define an eligible security to be a security that has been determined to present minimal credit risks. The revised standard for eligible securities under rule 2a-7 requires a single uniform minimal credit risk finding, based on the capacity of the issuer or guarantor of a security to meet its financial obligations. Additionally, the general credit analysis factors will be codified, which should assist boards by serving as objective and verifiable tools to rely on in the absence of NRSRO ratings. Removal of dependence on NRSROs achieves the SEC’s mandate while protecting investors and retaining a similar degree of credit rating.

When a money market fund’s board (or its delegate) makes its minimal credit risk determinations and examines the capacity of each security’s issuer or guarantor to meet its financial obligations, the following factors must be considered with routine monitoring:

1.

Financial condition

2.

Sources of liquidity

3.

Ability to react to future market-wide and issuer- or guarantor-specific events, including the ability to repay debt in a highly adverse situation

4.

Strength of the issuer or guarantor’s industry within the economy and relative to economic trends

Form N-MFP will undergo changes to accommodate the removal of designated NRSROs as a basis of determining minimal credit risk in money markets. From a technical standpoint, the removal of requiring designated NRSROs has negligible impact. However, in terms of compliance, credit rating information and determination of credit ratings (and the reporting thereof) should be reviewed.

Form N-MFP1 will be replaced with Form N-MFP2 beginning on October 14, 2016. Form N-MFP filers will be required to submit their filings using this new Form N-MFP2. From a filer’s standpoint, the difference between these two forms is minor. GoFiler Complete and GoMFP will be ready to file this new form before it becomes effective. As of now, the EDGAR System will not accept filings constructed using the Form N-MFP2 draft technical specification.